What are the types of disability insurance?

Disability insurance is insurance that will pay out regular paychecks in case you become too ill or disabled to work. There are several kinds of disability insurance — some provided by your employer, some you purchase yourself — and they all offer slightly different coverage and benefits for different situations.

Long-term disability insurance

Long-term disability insurance is a type of insurance you can buy that pays out monthly benefits if you become too ill or disabled to work. The benefit period can last two, five, or 10 years, or even until retirement, and the monthly benefit is up to 60% of your gross monthly income. The yearly cost generally is 1% to 3% of your annual salary.

Long-term disability insurance is the most cost-effective and comprehensive type of disability insurance, plus it can be purchased whether you work for an employer or for yourself.

Types of long-term disability insurance policies

Among long-term disability insurance policies, there are two big categories of policies that act very different when paying out claims:

Any occupation disability insurance
Any occupation disability insurance only provides benefits if you can’t work any job that you’re reasonable suited for because of illness or injury. This is much harder to prove and it’s harder to receive a benefit, but it’s also a generally less expensive than the types of own occupation disability insurance.

Own- occupation disability insurance
Own- occupation disability insurance is a long-term disability insurance policy that that defines a disability as an inability to work at your regular occupation. These are the kinds of policies you want, but of course it’s not that simple! There are also three kinds of own occupation disability insurance policies that you can get:

True own occupation: If you can’t work in your own occupation due to injury or illness, you get benefits — even if you start working a different job.

Transitional own occupation: If you can’t work in your own occupation due to injury or illness and you get a new job, you get benefits to make up the difference between your new (lower) and old (higher) salaries.

Own occupation, not engaged: If you can’t work in your own occupation and you haven’t started a new job, you get benefits. Once you start a new job, no matter what field, you stop receiving benefits.

Short-term disability insurance

Short-term disability insurance replaces a portion of your paycheck — up to 80% of your pre-tax income — if you can’t work due to illness or injury for a short period of time, up to one full year.

Short-term disability policies are often offered by your employer, and some states require that employers provide short-term disability coverage (some states even have their own state disability insurance programs.

The waiting period, or time before benefits are paid out, for short-term policies can be just a few weeks, so short-term policies can often cover living expenses while you’re waiting for your long-term policy to go into effect. But since the average disability time is about three years, short-term disability isn’t an alternative to long-term disability coverage; plus, it’s about the same cost as long-term disability (1% to 3% of gross income), so it’s not a very cost-effective choice, either.

Mortgage disability insurance

Mortgage disability insurance — also known as mortgage payment protection insurance — is a type of long-term disability insurance that specifically covers your mortgage payments if you can’t work due to illness or injury.

Mortgage disability insurance can be purchased from your mortgage lender, an insurance agency, or a broker, and doesn’t generally require underwriting process (including medical exam) that other long-term disability insurance policies require. The result: mortgage disability insurance can be a good option if you don’t qualify for life insurance or regular long-term disability coverage but don’t want to risk defaulting on your mortgage.

Supplemental disability insurance

Supplemental disability insurance closes the gap between the benefits paid by employer-sponsored disability plans (which can be taxed or capped), and the full amount of money you’ll need to cover your expenses in case you can’t work.

Social Security disability insurance

Social security disability insurance (SSDI) is a federal program that provides payouts to some disabled U.S. workers and families — but only after a drawn-out application process that can take three to five months. Over 60% of applications are denied at the first application level and the average payout is just over $1,000 a month, so it’s not worth relying on. Most people are better off with a private disability policy.

State disability insurance

Some states offer their owns short-term disability insurance plans that either employers pay for, employees pay for through payroll deductions, or a mix of both. The following states (and U.S. territory) offer state disability insurance:

California

Hawaii

New Jersey

New York

Rhode Island

Puerto Rico

You cannot purchase state insurance benefits through an agent or broker, and benefits are generally payable for a max of one year. (California, for example, will pay 60% to 70% of wages for up to 52 weeks; New York’s plan covers 50% of gross wages up to 26 weeks.)

Because state disability insurance benefits are short-term, you probably want to purchase a long-term disability insurance policy even if you have state disability insurance.

Business overhead expense disability insurance

Business overhead expense (BOE) disability insurance is a type of disability insurance specifically for business owners that will pay for a business’ overhead — including rent, utilities, employee salaries, payroll taxes, postage, accounting fees, and more — in case you become ill or disabled and can’t run your business.

Business overhead expense insurance needs to be bought in addition to or combined with a long-term disability policy, as BOE insurance will not cover your own salary and expenses.

Self insurance

“Self insurance” is a misnomer. It’s not insurance, it’s just savings. Some people prefer to use savings to replace income in the event of illness or disability; this is called “self insurance.” This can look like an attractive option to people wary of paying disability insurance premiums, but relying on savings to make up for income is a risky proposition because you just don’t know what is going to happen. It would take a lot of money to have enough in the bank to account for the possibility of being out of work long term.

Plus: 65% of adults have no savings set aside for emergencies, so chances are this is not an option.

Workers’ compensation

Workers’ compensation, also known as workers comp, is a type of insurance that your employer is required to have in every state; if you become injured at work. Many people assume that workers comp is a substitute for disability insurance — nope! Workers’ compensation does pay out a monthly benefit in the event an employee cannot work, but only if the employee’s injury happened at work.

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.

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